86% of High-Risk Retirees Fail Crucial Diversification Test, Raising Concerns Among Financial Experts

As retirement nears, many investors shift their focus to minimizing risk, often by pulling away from stocks in favor of safer assets like bonds and cash. However, a new study reveals that this strategy may leave retirees dangerously exposed to a different kind of risk: not having enough long-term growth. According to research from Jackson National Life Insurance Co., a staggering 86% of high-risk retirees fail the crucial test of proper diversification.

As experts caution, this type of overreliance on bonds and cash can undermine long-term retirement security, making it essential for retirees to strike a balance by including growth assets like stocks in their portfolios.

What the Diversification Test Reveals

The Jackson study assessed investors’ exposure to market risks based on five key financial benchmarks: spending, saving, cash allocation, stock-bond split, and asset diversification. Those who met fewer than two benchmarks were categorized as high-index, or the most vulnerable to market risk.

To test diversification, the study examined whether investors held assets in at least four of five categories: stocks, bond funds, cash, bonds, and other investments, and 86% of high-risk investors failed to meet this basic benchmark.

Instead, many have allocated far too much of their portfolio to cash or bonds, leaving them vulnerable to inflation and outliving their savings. The study found that 49% of these retirees hold nearly half their assets in cash, well above the recommended 20% of assets.

Why Retirees Struggle With Proper Diversification

Experts warn that retirees who seek safety in bonds and cash may be overlooking the larger risks: inflation and the possibility of outliving their assets. “Most retirees think they’re avoiding risk by piling into bonds and cash,” says Ryan Graves, founder of Bemiston Asset Management. However, as inflation eats away at the value of cash and bonds, “excessive cash and bonds won’t save you—it guarantees you’ll fall behind.”

In fact, Graves says the most common mistake he sees is equating safety with cash. Meanwhile, other investors similarly seeking safety may overconcentrate in dividend stocks and bonds, becoming too focused on current income instead of growth, he adds.

Malissa Marshall, founder of Soaring Wealth, observes another issue in her clients’ portfolios: Many accumulate a “hodgepodge” of investments over time without understanding the importance of diversification. “They’ve accumulated target-date funds and individual stock picks, duplicating holdings inadvertently,” she says.

When retirees become overexposed to one asset class, Marshall likes to point to the Callan Periodic Table as evidence that past performance doesn’t guarantee future success. For example, cash was among the worst-performing asset classes in 2016 and 2017, only to top investment returns in 2018, according to Callan.

Another issue is that retirees often over-rely on the S&P 500, thinking it offers complete diversification. But Beau Kemp, an advisor at SwitchPoint Financial Planning, warns that the S&P 500 is “heavily tilted toward large U.S. companies,” which can underperform in certain markets. During the 2000s, for example, small caps and emerging markets outperformed while large caps struggled, Kemp notes. “We don’t have to look far back to see how painful it can be when U.S. large caps underperform for an extended period,” he says.

How Financial Experts Recommend Fixing the Problem

Financial advisors emphasize the importance of a balanced approach. Rather than simply relying on cash and bonds or leaning in too heavily on stocks, experts recommend diversifying across different asset classes. Experts often recommend having three years of retirement expenses in low-volatility assets like money markets, short-term bonds, or individual bonds, Kemp notes, but he suggests pushing closer to five years or more if you can.

Kemp also stresses the importance of being diversified within your stock portfolio—not just U.S. large caps, but also small caps and midcaps, developed international markets, and emerging markets. “This type of diversification helps manage sequence of returns risk in retirement because it ensures that some parts of the portfolio are working when others aren’t,” he says.

Moreover, dynamic strategies are key to managing market risk. “You need dynamic withdrawal strategies—flexibility to spend less in down years and more in strong markets,” says Graves, adding that being dynamic also means adjusting your investments when the numbers don’t add up. For example, in early 2021, 10-year Treasury bonds were paying less than inflation, meaning investors who stuck with a fixed mix of bonds risked guaranteed losses—when shifting more into stocks might have made more sense.

The Bottom Line

For many retirees, the temptation to play it safe can actually be a risky move. In fact, retirees who focus too heavily on cash or bonds may unintentionally expose themselves to greater long-term risks—and according to Jackson research, many high-risk investors fall right into this trap.

But true diversification means more than just investing across asset classes—it also requires building a strategy that accounts for inflation, longevity, and market volatility. When in doubt, consulting with financial professionals can help ensure your portfolio is aligned with your long-term financial goals.